General Insurance Co. of America v. Lamar Corporation

• Decision Date: 31 July 1973
• Docket Number: No. 72-1789.,72-1789.
• Citation: 482 F.2d 856
• Parties: GENERAL INSURANCE COMPANY OF AMERICA, a Washington corporation, Plaintiff-Appellee, v. LAMAR CORPORATION, a Michigan corporation, also known as Lamar Pipe Company, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

482 F.2d 856 (1973)

GENERAL INSURANCE COMPANY OF AMERICA, a Washington corporation, Plaintiff-Appellee, v. LAMAR CORPORATION, a Michigan corporation, also known as Lamar Pipe Company, Defendant-Appellant.

No. 72-1789.

United States Court of Appeals, Sixth Circuit.

Argued February 5, 1973.

Decided July 31, 1973.

William E. Rheaume, Lansing, Mich., for appellant; Abood, Abood & Abood, Lansing, Mich., on brief for Lamar Corp.

Stephen C. Bransdorfer, Grand Rapids, Mich., for Concrete Pipe Assn. of Michigan as amicus curiae; Miller, Johnson, Snell & Cummiskey, Grand Rapids, Mich., on brief, amicus curiae, for Concrete Pipe Assn. of Michigan, Inc.

John A. Kruse, Detroit, Mich., for appellee; Harvey, Kruse & Weston, Detroit, Mich., on brief for General Ins. Co. of America.

Before WEICK, McCREE, and KENT,^* Circuit Judges.

McCREE, Circuit Judge.

This appeal presents primarily the question whether under the Michigan Building Contract Fund Act of 1931, M. C.L.A. §§ 570.151-570.153,¹ money paid to a contractor performing a public project constitutes a trust fund for the payment of subcontractors and materialmen for labor and material furnished on that project. We determine that it does not and reverse the judgment of the district court.

Defendant-appellant Lamar Corporation (Lamar), a manufacturer of cement pipe, appeals from a judgment for plaintiff-appellee General Insurance Company (General), a surety on a payment and performance bond. Sheldon Contracting, Inc. (Sheldon), had contracted with the city of Marysville, Michigan, to construct a sewer, and, as required by Michigan law,² obtained payment and performance bonds from General. The bonds named Sheldon principal and the city of Marysville and the subcontractors, laborers, and material suppliers of Sheldon on the Marysville job obligees. Lamar is a materialman that supplied sewer tile worth $43,243.16 for the Marysville project. Before Lamar began supplying materials on the Marysville job, Sheldon owed it $50,635.05 on open account, and during the period when Lamar was supplying this tile, Sheldon paid it a total of $80,555.86, which Lamar first applied to the old indebtedness and to debts incurred by Sheldon on other projects under construction contemporaneously with the Marysville job.

Sheldon defaulted before the Marysville project was completed, and General, its surety, was required under the obligation of its performance bonds to complete the job. In doing so, General incurred costs in excess of $40,000 and brought this action against Lamar for the excess Lamar received from Sheldon over the cost of materials it supplied for the Marysville project. Lamar counterclaimed for $25,974.41, the balance it claimed was due on the Marysville job, but the district court did not discuss the counterclaim in its findings and conclusions and Lamar does not press the matter on appeal.

The district court, sitting without a jury, found that the money paid to Lamar by Sheldon during the period in question came entirely from the Marysville job even though Sheldon was working on other jobs at the time. It also found that Lamar knew the source of these funds and that Lamar had "an affirmative duty to apply the payments received first to the discharge of the indebtedness incurred for materials supplied on the City of Marysville job." The court accordingly determined that the funds paid by the city of Marysville to Sheldon constituted a trust fund under the provisions of M.C.L.A. § 570.151; that in the alternative, independent of the statute, Lamar was a constructive trustee for the other materialmen; that the funds did not lose their trust character when Sheldon paid Lamar; and that Lamar is therefore obligated to repay General as subrogee of the beneficiaries of the trust $37,312.70 with interest from the date of the last payment by Sheldon.

On appeal, Lamar and amicus curiae Concrete Pipe Association of Michigan, Inc., attack both the factual findings and the legal conclusions of the district court. However, in the view we take of the case, it is unnecessary to determine whether the findings of fact are correct, although we observe that a review of the evidence reveals that the only facts about which any dispute exists depend upon an assessment of credibility, a function of the district court in which an appellate court should indulge the better perspective of the trial judge. See Fed.R.Civ.P. 52(a).

Because this is a diversity case, our duty is to decide the appeal as the law and policy of Michigan commands. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Angel v. Bullington, 330 U.S. 183, 67 S.Ct. 657, 91 L.Ed. 832 (1947). The principal issue of Michigan law for our consideration is whether the Michigan Building Contract Fund Act applies to public as well as to private projects. Resolution of this issue requires reconciliation of the two Michigan Supreme Court cases in which the Act has been interpreted.

In Club Holding Company v. Flint Citizens Loan & Investment Company, 272 Mich. 66, 261 N.W. 133 (1935), a subcontractor on a municipal construction project assigned the funds due it from the principal contractor to a bank that was financing the subcontractor's operations. The bank applied the funds received from the contractor to the debt owed by the subcontractor on the construction project and to unassociated debts of the subcontractor. The subcontractor, however, had not notified the bank of certain debts it owed to materialmen on the municipal sewer project. After one materialman recovered against the contractor's surety for its debt, People for use of Youngs v. United States Fidelity & Guaranty Company, 263 Mich. 638, 249 N.W. 20 (1933), the contractor sued the bank to impress a trust by virtue of the Building Contract Fund Act on the funds received by the bank from the contractor. In affirming a judgment for the defendants, the Michigan Supreme Court held that the act did not create a civil cause of action and did not apply to the construction of public projects:

Section 2 defines the statutory fraud and provides a penalty, while section 3 states what shall be evidence of intent to defraud. The act affects those matters which are criminal in their character and creates a particular statutory crime. The civil rights and obligations existing between owners, contractors, subcontractors, materialmen and the various trades, etc., seem to be undisturbed by the act.

To hold in the instant case that the Investment Company received such assigned funds in a trust capacity might require a similar application to moneys the subcontractor might pay anyone, including his butcher, baker, or candlestick maker, and such a holding might possibly relieve the principal contractor\'s surety from the obligations imposed by Act No. 187, Pub. Acts 1905, as amended, being 3 Comp. Laws 1929, §§ 13132-13136, and bonds given pursuant thereto. The act in question stands alone, without any reference to another; it is in harmony with the various provisions of the mechanics\' lien law, and we cannot presume, in the absence of explicit language, that it was intended to apply to the erection of public buildings or to public works. To do so might have a nugatory effect on the provisions of the 1905 act as amended, and strike from the books a line of well-understood and established authorities. It is fundamental that the law does not favor repeal by implication and that penal statutes must be strictly construed.

272 Mich. at 72, 261 N.W. at 135.

The second time the Michigan Supreme Court had occasion to interpret this statute was in B. F. Farnell Company v. Monahan, 377 Mich. 552, 141 N.W.2d 58 (1966). In that case, a contractor received payment for work performed on a private construction contract and shortly thereafter filed a voluntary petition in bankruptcy and delivered the contractual payment to the trustee in bankruptcy instead of to the materialmen and subcontractors working on the job. The materialmen brought suit under the Building Contract Fund Act for civil relief against the contractor. Overruling the first ground for decision in Club Holding, the Michigan Supreme Court reversed the trial court's dismissal of the case and held that the Building Contract Fund Act created a civil remedy: "When a statute provides a beneficial right but no civil remedy for its securance, the common law on its own hook provides a remedy, thus fulfilling law's pledge of no wrong without a remedy." 377 Mich. at 555, 141 N.W.2d at 60, citing Ferguson v. Gies, 82 Mich. 358, 46 N.W. 718 (1890), and Creek v. Laski, 248 Mich. 425, 227 N.W. 817 (1929). The court summarized the effect of its decision on Club Holding in this way:

To conclude: It is clear that a contractor or subcontractor, by delivering to his trustee in bankruptcy what he himself holds as trustee under the act of 1931, cannot thereby defeat the common law remedy this Court has provided in favor of those who under the act are aggrieved by his statutory violation. Whether defendant\'s act of turning the funds over to his trustee did or did not place such funds beyond the reach of plaintiff is beside the point. Plaintiff had the remedy it seeks to pursue, as against the defendant, when the latter retained or used the funds as charged in its complaint. That remedy was not destroyed, either by defendant\'s voluntary petition in bankruptcy or by his voluntary payment to the trustee in bankruptcy of that which was not his. To the extent Club Holding collides with these views, Club Holding should be overruled.4

4 An examination of all briefs filed for and against reversal of Club Holding discloses that the common-law doctrine to which Michigan became committed by Stout v. Keyes 2 Doug. (Mich.) 184 Ferguson v. Gies and Creek v. Laski, all supra, was neither urged upon the Court nor discussed by any counsel in the case. No one of the three cases was cited or mentioned. The thrust of the argument made by the

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